As a 60-plusser, the question of where to live and how to ensure a secure future becomes increasingly important. One option that deserves careful consideration is investing in life rights.
From a legal standpoint, life rights offer several advantages that make them a compelling choice for 60-plussers. This article will explore what a life right is and why you should consider this option by looking at some of the benefits and downsides of investing in a life right.
The Life Rights Model Explained
In a Life Right agreement, the owner (the developer) grants the right to live in a property to the holder, who pays for this right, and the occupant, is the person who lives in the property. Typically, the occupant is the same person as the holder, although the holder can be someone else like a family member or trust. The right of occupation ends upon the occupant’s death or if the occupants voluntarily decide to terminate the life right and leave. The holder of a life right obtains the same rights as a lessee under a lease registered against the property’s title deed.
Understanding Life Rights:
A life right simply put, is a contractual agreement in terms of which, you as a retiree, buy the right to occupy or live in the unit for the duration of your life. While you do not own the property, you have the exclusive right to occupy it and enjoy the benefits of the retirement community or complex where it is situated. The life right therefore includes the right to use services in the housing development scheme or retirement village, and you would have to pay a monthly levy to a managing agent in this regard. When you die, the right to the unit goes back to the owner, who can then sell it again. The contract specifies the compensation your estate will receive upon your death.
Life rights are strongly protected in South African law, and it is regulated by the Housing Development Schemes for Retired Persons Act 65 of 1988 (“the Act”). According to the Act, the life right holder must be at least 50 years old to enter into the contract, although some retirement villages may have a higher minimum age requirement.
The life right contract outlines all the rules and restrictions regarding the purchase of the life right, as well as the compensation you will receive upon your death or if you choose to leave the retirement community. It is important to fully understand all the terms of the contract before signing. It is also important that the contract complies with the requirements set out in Section 4 of the Act, in order for it to be valid and enforceable. Section 4 outlines the requirements with which the life rights contract should comply. The life rights contract should for example state whether the title deed of the land has been endorsed in terms of section 4C and whether the land on which the unit is situated is encumbered by a mortgage bond. In addition, there should be an undertaking by the developer that he or she will not further encumber the land if a mortgage bond is registered over the property which will be subject to the life right.
To elaborate on the above, in terms of the Act, a developer is not permitted to alienate a life right or enter into an agreement to such effect until the title deed is endorsed with the consent of the owner of the land (and if the land is mortgaged, with the mortgagee’s consent) in accordance with section 4C of the Act.
Furthermore, the Act aims to safeguard the rights of the life right holders by stipulating that the developer cannot receive any consideration and payment until an architect or quantity surveyor issues a certificate that the scheme aligns substantially with approved building plans and town-planning schemes and is adequately completed for the utilization of life rights. Additionally, an attorney must certify that the title deed has been endorsed in accordance with section 4C of the Act before any consideration can be received under the contract.
While opting for a life right presents retirees with a more economical and convenient choice, it’s crucial for the life right holder to recognize that their rights and responsibilities stem from the contractual agreement. As a result, retirees must thoroughly understand the facilities provided and the associated expenses.
Estate Planning Considerations
Normally, when someone dies and has property, their family has to deal with selling their house, which can be a lot of work and take a long time. But with a life right, there is no need for them to worry about selling the property since ownership of the property remains unchanged. Everything is taken care of already, so it is one less thing for your family to stress about during a difficult time. Therefore, investing in Life Rights presents a significant advantage. There is peace of mind knowing that you will not have to burden your heirs with maintenance of the property or handle the hassle of selling the unit. Upon your passing, your estate seamlessly receives an amount for the life right, making life rights a more appealing investment option to most retirees compared to traditional property ownership.
As mentioned above, when the person holding a life right passes away, the ownership of the right to use that unit goes back to the owner of the property. The developer can then sell this right to someone else. If a couple has entered into a life right agreement, it is important to remember that this agreement only ends after both partners have passed away. The estate of the partner who dies first does not get any money from this arrangement when the surviving spouse takes over the life right. This detail should be considered when planning each partner’s estate.
When the time comes to sell the right after the second dying spouse has passed away, the money made from the sale is handled in a specific way. The original amount paid for the life right, along with a share of any profit made from the sale (which is decided when you first buy the life right) minus any costs for selling or fixing up the unit, goes to the deceased’s estate.
It is also good to know that if the life right holder decides that they do not want to live in the unit anymore, they can give up their right. In this situation, the right is sold again, and the financial arrangements work in the same way as described above.
In your life rights contract, it’s essential to specify the portion of the purchase price that will be allocated to your estate upon your passing. It’s crucial to understand that these terms can differ significantly between different developments.
Other benefits to consider
A financially viable option
Compared to purchasing a property outright, life rights often require a lower initial investment, making them a more financially viable option for retirees. They are therefore a more cost-effective option compared to sectional title or freehold ownership for example. There are very few barriers to entry in terms of costs because buying a life right does not involve the transfer of property or transfer fees, there are also no bond registration fees or VAT payable.
Access to community facilities: Levies
Retirement communities offering life rights often provide a range of facilities and services tailored to the needs of senior citizens, enhancing your quality of life and ensuring that your needs are met as you age. A levy is normally paid for access to these amenities and the managing agent will be responsible for the maintenance of the property. The life right holder therefore does not have to worry about maintenance as the managing agent or developer will be responsible for that. The developer remains the sole owner of the unit and should therefore be responsible for upkeep and maintenance. Life right holders are also an attractive option given the fact that the holders of the rights should not be faced with unexpected or ‘special’ levies.
Right of occupation
Life rights provide a legally recognized right of occupation and security of tenure, protecting you from arbitrary eviction or displacement. Life rights are strongly protected in our law and the Retired Persons Act places many restrictions on developers. As an example, developers require the consent of at least 75% of the holders of rights of occupation in a housing development scheme if the developer wishes to alienate the land free of such rights in terms of section 4B(1) of the Act. Any alienation taking place without the consent of the life right holders as described above will be regarded as null and void.
Section 4C also provides that the alienation of a right of occupation should be subject to endorsement against the title deed. This simply means that developers cannot sell any rights of occupation held by the life right holder, unless the title deed of the land on which the right relates has an endorsement in the title deed to the effect that the land is subject to a housing development scheme. Section 4A also provides that the right of occupation shall for all intents and purposes be regarded as a registered long-term lease, and these rights will rank in priority to other rights registered or endorsed against the title deed.
Possible Downsides
It is important to also consider some of the possible disadvantages of investing in life rights before you decide to purchase such a right. Firstly, it is vital to consider the legal implications.
Resale and Transfer Restrictions
Life rights typically come with restrictions on resale or transfer. Ensure that you understand these restrictions and how they may impact your ability to dispose of the rights in the future.
Estate Planning Implications
Life rights can also not be inherited as they apply to the life right holder and their spouse only and cannot be passed down once the holder dies.
Restrictions on occupancy
The rules on occupancy are also strict because only the life right holder or nominated occupants may live in the unit and no other person is allowed to stay therein.
Wide decision-making power to developer
Although the Retired Persons Act provides considerable protections to life right holders, the developer will ultimately have extensive decision-making power which will take precedence over the life right holders’ as it pertains to the management of the property. It is also important for the life right investor to study the management agreement and the levy structure before investing in a life right scheme. Investors should be provided with a transparent levy structure which should budget for the next two to three years. This will ensure that you know exactly what you are signing up for and that you will not be faced with any surprises later on.
Before investing in life rights, it’s crucial to consider the legal implications and ensure that you understand the terms and conditions of the agreement.
Disclaimer: This article is intended for informational purposes only and should not be construed as legal advice. Readers should not act upon any information in this article without seeking professional advice. The content reflects the author’s understanding of the subject matter as of the date of publication, and laws and regulations may have changed since that time. The author and publisher disclaim any liability for any direct, indirect, or consequential loss or damage incurred by any reader relying on information in this article.
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